The standard hotel management fee is three percent of gross revenue. The temptation is great to do it yourself and capture this potentially large sum. Proceed with caution. Efficiency in hotel management requires skill, scale, and time. Great third-party hotel managers understand how to balance talent, systems, and business development in a platform that consistently delivers exceptional returns for their owners.
A high-quality third-party hotel manager is worth every penny in management fees. They allow you to leverage your most valuable resource – your time – to source, underwrite, and close on more deals. Their value comes from the same thing that makes your investment business great – specialization, scale economies, and reputation.
Every investor knows the value of specialization. A rifle shot approach allows you to quickly screen deals for fit and discard those that don’t. This clears your desk of distractions so that you can look at more deals in less time.
Exceptional third-party hotel managers are similarly very picky about the assignments they accept.
Each brand, service level, and geography has its own challenges and attributes. The systems and culture to fit these different property types takes many years to optimize. As a result, hotel investors can fast-track their profitability by hiring a best-in-class operator with these kinks worked out.
Hotel managers that align with your investment criteria and corporate culture allow you to hand off the major daily tasks with confidence. Periodic reporting should then be enough to keep track of an maximize the value of your investment.
You wouldn’t perform surgery on yourself, so why leave this specialization to your best judgement? Outsourcing this responsibility allows you to further specialize and focus on the areas that will bring you the greatest value, notably, finding spectacular deals.
Economies of Scale
Effective hotel management require dozens of systems to organize talent, guest interactions, service contracts, and other important operational requirements. These range from documented processes and procedures to complex IT resources.
Brands provide many systems, but many more add-ons work to complement and enhance their value. Unfortunately for the small operator, the best third-party resources require scale to even get the provider’s attention.
An institutional-quality property management platform is expensive to build.
Hotel managers handle accounting, revenue management, quality assurance, sales, marketing, procurement, service contract negotiation, and many other capital-intensive aspects of operations. These have tremendous fixed cost hurdles before realizing efficiencies.
An efficient home office results in profitability for the management company. Still, these efficiencies often help each hotel in their care realize more value from optimized systems.
Pricing power is the clearest advantage for large hotel managers. They get preferential treatment on procurement and service agreements that just aren’t accessible by small operators. That said, an astute asset manager should look through the hype to confirm that a local provider wouldn’t be a better fit for optimizing performance at the property.
Human capital is another advantage that is difficult to match. Large third-party hotel managers have a deep bench of talent that helps fill talent gaps in times of transition or unexpected turnover. They can also offer more attractive benefits to recruit and retain top talent.
Pricing and talent are only two examples that are difficult to build on your own with a portfolio of less than 20 hotels.
Human capital is the backbone of every great hotel operation.
Hotel managers build a great team over time by honing a reputation that aligns with their values and culture. You cannot replicate this overnight. It takes tremendous energy and attention to build a good reputation.
Turnover in the hotel industry is notoriously high compared to other businesses. It’s not uncommon to see a high-quality individual make multiple moves in a five-year period. Yet, the best hotel managers take great care to retain top talent through consistent engagement and growth opportunities. They also use their reputation to recruit high-potential individuals that could be a gamechanger for your property.
A hotel manager’s reputation also helps you get financing for your deal.
Astute investors and lenders understand the importance of management quality in affecting the value of a hotel. Hotel managers with a good reputation provide comfort to make a deal, and their involvement in the deal may even de-risk it to the point to allow for lower cost of capital.